Beth Hammack, President of the Bank of Cleveland, mentioned that monetary policy is ready for a break. She recommends keeping the current interest rate steady after the first quarter’s cuts of 75 basis points until clearer signs regarding inflation or employment appear. The consumer price index for November is at 2.7%, but it might not show the real annual price increase due to some data issues. It’s also believed that the neutral interest rate might be higher than many think.

US Dollar and the Federal Reserve

The US Dollar Index currently sits at about 98.65, showing a slight drop of 0.06% today. The Federal Reserve works on US monetary policy to ensure price stability and full employment mainly by changing interest rates to control inflation. The Federal Reserve holds eight policy meetings each year, led by the Federal Open Market Committee (FOMC), which includes twelve officials. In special situations, the Fed can use Quantitative Easing (QE) to boost the economy, which usually weakens the US Dollar. On the other hand, Quantitative Tightening (QT) slows down bond purchases, often helping the Dollar’s value. The Federal Reserve is signaling a pause on interest rate changes after cutting rates by 75 basis points earlier in 2025. We are now in a wait-and-see phase as the Fed evaluates the impact of those cuts on the economy, indicating that the aggressive loosening policy from early in the year is currently over.

Mixed Economic Signals

This pause aligns with recent data showing a mixed economic outlook. The November jobs report revealed a slowdown with only 155,000 jobs added. At the same time, the Consumer Price Index is at 2.7%, and Core PCE remains above 3%, which raises concerns. Neither inflation nor employment data is weak enough to push the Fed toward another immediate cut. For derivative traders, this uncertain period means clear trends in interest rates and the US dollar may lessen as we move into the new year. This situation typically leads to lower implied volatility for options on currency and bond futures. Selling volatility could be an attractive strategy to generate income. Since the Fed is likely to stay steady until at least the late January meeting, traders might consider strategies like selling short-dated strangles on the EUR/USD pair. This approach would be profitable if the currency pair stays within a specific range, taking advantage of the expected calm in the market during the holiday season. With the DXY around 98.65, this reflects a lack of immediate direction. However, caution is needed as the Fed has suggested that inflation might be stronger than reported, and the neutral interest rate might be higher than previously thought. Any unexpected rise in the next inflation report could quickly change rate expectations, making it wise to hold long-volatility positions with inexpensive, far-out-of-the-money options as a form of protection. We saw a similar market behavior in 2024 when traders aggressively anticipated rate cuts that the Fed was reluctant to make, which led to sharp market reversals. The current pause feels reminiscent of that pattern, reminding us not to jump ahead of actual central bank policy. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now